The conventional wisdom is that sovereigns repay their debts not because they fear litigation but because they wish to preserve their reputation in the capital markets or because they have some other incentive to repay. The ongoing case of NML Capital v. Argentina has the potential to shatter this consensus. A panel of the US Court of Appeals for the Second Circuit has approved a novel injunction, which requires Argentina to make full payment to holdouts who declined to participate in its post-2001 debt restructuring if the country intends to pay restructuring participants. The decision has caused market turmoil and may have broader systemic consequences. Most notably, if made broadly available to creditors, injunctions of this sort would increase bondholders’ incentives to hold out, undercutting official-sector efforts to encourage private sector involvement in debt restructurings.
This brief article provides both modern and historical context to highlight the significance of NML v. Argentina. The case is important both for its interpretation of the pari passu clause — some version of which appears in nearly all sovereign bonds — and for the novelty of its injunctive remedy. The practical import of the court’s interpretation is that the pari passu clause represents a promise not to restructure, or at least not to restructure using common techniques that sovereigns have employed since the inception of the bond markets.